Professionals across the board are struggling to determine what changes the Tax Cuts and Jobs Acts (TCJA) which was signed into law on December 22, 2017 will have on their businesses and their client’s businesses. The TCJA is 479 pages long and the IRS is still writing regulations as to how they are going to interpret it.  Simply put this is going to be a long process.

An issue of particular importance to business owners going through a divorce is what effect the TCJA will have on any business evaluation that might occur as part of the divorce. Often a business is the largest asset in a marriage.  Getting a proper value of that asset is essential.

The TCJA has changed not only the tax laws, but how business appraisers are going to perform their appraisals. Some of the provisions in the TCJA for businesses are permanent; and some are temporary.  Knowing which ones are permanent; or temporary is vital.  The TCJA brought numerous changes to how businesses are taxed which effects how they are valued.  One of the largest changes is the reduction of the effective tax rate for corporations and small and medium pass through entities.  The TCJA also changed the calculation of taxable income for businesses.  These two changes together can be significant if a business evaluation is being performed using an Income Approach.  In theory there should be more income for businesses.  Does this equate to a higher value?  Maybe yes, maybe no.

Also of concern is not all companies are treated the same under TCJA. For example, many professional service companies lose out under TCJA when compared to other businesses because the deductibility of qualified business income phases out.  Once it phases out they are taxed at a higher rate.  Professional service companies are any business who provide professional services such as:  lawyers, accountants, doctors and performing arts to list a few.  The type of business being appraised is a significant factor in its value.  An appraised value for an accounting practice with $315,000 in income could be vastly different than an appraised value for a construction company bringing in the same income, even if they are both LLCs.

This is the tip of the iceberg that attorneys and business appraisers are facing for their client’s in having businesses valued under the TCJA. The best way to protect yourself with regards to a business evaluation is to retain not only an attorney well versed in the issues involved, but a business appraiser who is familiar with the new tax law.  If you have questions regarding business appraisals please contact the attorneys at Iandoli & Edens, LLC at 908-879-9499.